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Many mutual funds across categories are undergoing significant changes, owing to the SEBI circular that seeks to standardise schemes across fund houses.
Some funds have been merged, while others are seeing notable changes in their fundamental attributes.
Many funds are also being re-positioned under new categories.
But one of the categories which appears to be least impacted is ‘Equity Savings’. Most of the funds under it follow similar mandates and seem rightly positioned.
Within the hybrid category, equity savings funds have been fast-gaining investors’ attention.
These funds combine debt, equity arbitrage and equities. Since these schemes allocate at least 65 per cent to equity and arbitrage opportunities, they are treated as equity funds for tax purposes.
Earlier, investors did not have to pay tax on long- term capital gains (LTCG) (if redeemed after a year).
Now, dividends and capital gains (if redeemed after a year) are taxed at 10 per cent (plus surcharge and cess).
Still, these funds score over bank fixed deposits and debt funds on the taxation front, particularly for those in the higher tax bracket.
Currently, there are 16 schemes under this category — all having a limited track record of around four years.
Reliance Equity Savings has outperformed the category over one-year, 18-month (1.5-year) and two-year time frames, clocking a compounded annualised return of 8.6 per cent, 10.4 per cent and 11.6 per cent, respectively.
The category generated 6.7, 7.9 and 9.7 per cent returns, respectively, during these periods.
Investment approach
Equity savings funds allocate around 30-35 per cent each in equity, debt and arbitrage opportunities.
The equity portion boosts portfolio returns, while the debt portion provides regular income, pegging down the risk.
These schemes also endeavour to capitalise on arbitrage opportunities, taking advantage of the price differentials in the segments, such as cash and futures markets.
The hedging strategy helps the funds reduce volatility in returns.
These funds are suitable for investors looking for some exposure in equity but with lower risk appetite.
The ideal holding period would be 1-3 years.
Portfolio
Reliance Equity Savings has maintained an average combined equity exposure (equity + hedged position) of 66.5 per cent over the last one year.
As per the latest portfolio, the allocation to hedged and unhedged positions stood at 29 and 39 per cent, respectively.
The equity portion follows a multi-cap strategy, though the current portfolio is tilted towards large-caps.
Of the equity portion, around 69 per cent is allocated to large-cap stocks as of March 2018 (as per the AMFI M-cap classification).
The fund’s debt portfolio tries to capitalise from accrual strategy with moderate duration.
The current portfolio shows that the fund mainly bets on low- rated debt instruments — about 1 per cent in AAA-rated and 26 per cent in AA- and below-rated securities.
The average maturity has been 2-4 years over the last one year, mitigating the rate risk.
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